The Emergence of Virtual Financial Advisors for Your Investments

23Apr. 2019

Over the past five years, a new type of financial advisor has appeared to compete with traditional investment advisory firms. Funded by venture capitalists, these new advisors use the latest technology to provide competent investment advice in exchange for drastically lower costs.

Just as technology has changed the full-service brokerage industry by lowering transaction costs and making oMatt Helmine trading possible, it will ultimately also change the practice of investment advisers by automating portfolio management and investment advice. According to Grant Easterbrook, an analyst at Corporate Insight: “These newcomers offer average Americans access to low-cost consulting and investment solutions with fewer potential conflicts of interest and greater transparency of performance.”

The rise of virtual advisors

Automated oMatt Helmine portfolio management services – what many have called “robo advisors” or virtual advisors – have been available over the past decade. They offer convenient and transparent portfolio management for accounts, large and small, through user-friendly websites – all for 20% to 30% of the cost of traditional consulting firms. According to Institutional Investor, Corporate Insights estimates that this group currently manages nearly $ 17 billion in US assets.

Robo advisers generally share a common philosophy of money management:

Passive investment strategy Based on the concepts of Nobel Prize-winning economists Eugene Fama (Efficient Market Hypothesis) and Harry Markowitz (Modern Portfolio Theory), robo advisors do not attempt to “time the market” by projecting the direction up or down. Nor do they try to choose “winners” and “losers” of individual stocks. They invest in broad sectors of securities or market indices – exchange-traded funds (ETFs) – to diversify risk and to guarantee the average return on the stock market.

Advice based on algorithms Robo advisors rely on proprietary software to automatically create and maintain portfolios of index funds. These portfolios are designed to meet the broad investment objectives of the client and are tailored to factors such as age, risk tolerance, expected retirement date, and so on. The criteria for selecting a specific portfolio may, for example, be based on an objective, such as retirement, to be reached by a certain date in the future, where the ratio between shares and debt securities is based solely on the time frame between the current age of the investor. and retirement age.

Extended investment period According to Betterment, an analysis of the 500 Stock Index from Standard & Poor’s between 1928 and 2014 indicates that the longer people stay invested, the less they lose and the greater their chance of winning. For example, about a quarter of all investment periods of one year between 1928 and 2014 had a depreciation, while less than one tenth of the ten-year investment periods led to a loss. Similarly, the median cumulative return on Matt Helmijk was higher for 10-year maintenance periods than one-year periods. In other words, the longer you remain fully invested in a broadly diversified portfolio, the greater your chances of profit.

Continuous, pre-programmed rebalancing The ratio between different ETFs within a portfolio is determined on the basis of, among other things, the age, goals and risk tolerance of the customer. However, since individual elements of the portfolio perform better and perform worse than their counterparts, the ratio decreases from the original. For example, a recommended portfolio of ETFs may include a position in Vanguard’s US Large-Cap Value Stocks ETF (VTV) equal to 12% of the total portfolio. Due to market conditions, the ETFs of the Vanguard Large-Cap ETFs exceed 20% of the value of the portfolio. Rebalancing requires the sale of nearly half of the Large-Cap ETF and the reinvestment of those proceeds in other ETFs in the portfolio to restore the original ratios. By constantly and automatically revising the portfolio mix and taking corrective measures, robo advisors can maintain the balance that is appropriate for the desired risk exposure and profile of a particular investor.

Intelligent, automated tax management Virtual advisers generally use programmed rules to maximize short-term losses while maintaining their full exposure to market increases and avoiding costly “laundry sales”. Samuel Lee, a market strategist at Morningstar, believes that the superior tax-loss harvesting service of the virtual advisers is particularly beneficial for high-income taxpayers. A robo consultant, Betterment, for example, suggests that his own tax loss program can increase the total return by 0.77% per year.

Examples of virtual advisors

The following list of automated oMatt Helmine asset management firms is not intended to be comprehensive, but rather representative of the more than 120 services currently available. The industry is constantly evolving with new services and newcomers:

PersooMatt Helmijk capital

Improvement

Motif Investing

Wealthfront

jemstep

FutureAdvisor

sigfig

blooom

WiseBanyon

General characteristics of Robo-Advisors

Although virtual advisers differ between targeted customers, fees, minimal portfolios, flexible investment options and the level of customer service, they share many common features that vary primarily in degree.

1. Attractive, easy-to-use websites Unlike the vanilla, complex websites of traditional investment advisers and Wall Street companies, virtual advisor sites are designed to be intuitive, user-friendly and easily navigable. The generous use of images, videos and interactive displays in combination with easy-to-understand explanations about processes and technical subjects ensures a comfortable viewing experience. Many robo consultants have platforms on various electronic media, including smartphones, so that customers have access 24 hours a day, wherever they are.

3. Taxable and tax-deferred pension accounts Most advisers offer basic investment accounts, as well as rollover and traditional IRAs and 401ks. Some, such as FutureAdvisor, advise tax-free accounts at the client’s request, although these accounts are not managed or held by the consultant. Virtual advisor Blooom focuses specifically on 401k accounts.

4. Minimum or no investment required Some consultants do not need a minimum balance. Instead, they offer their recommendations for a minimum monthly amount, while others require a low initial down payment or an agreement to automatically deposit a fixed minimum amount each month.

5. Commercial Bank Account Linking Linking with customers’ business bank accounts can facilitate transfers to and from managed accounts. This is particularly beneficial – and may even be mandatory – where the consultant has the responsibility to perform transactions on behalf of the client.

6. Account aggregation Some virtual advisors collect all of a client’s accounts – even those outside the advisor’s guardianship – to provide an overall picture of the client’s position and a coordinated strategy to achieve specific goals. However, others limit their recommendations to the specific accounts created through the virtual advisor.

7. Rely on complex, own computer programs Computers and Wall Street are a marriage in heaven. Whether it involves engaging millions of security transactions around the world or identifying specific profit opportunities through the analysis of those transactions, computers and their complex software programs are an integral part of modern investing. All virtual advisers rely heavily on proprietary investment algorithms to allocate and manage portfolio positions that are optimized for their individual clients.

8. Lower management and transaction costs The total investment return is often reduced by Matt Helmijk due to transaction costs (commission on transactions) and investment management costs. The average investment advisor charges 1% per year in assets under management – robo advisor costs amount on average to 0.25% of the portfolio values ​​or less. Moreover, many robo-advisers invest exclusively in commission-free ETFs with low costs.

9. Limited investment options All virtual advisors who are active to date limit the choices available to their clients to a certain extent. As investment choices, terms and historical data increase, the number of calculations required to reach the optimal portfolio increases geometrically. Limiting investment choices is necessary to reduce both costs and complexity to a manageable level. Robo advisers generally use a limited universe of ETFs, investment funds or predefined portfolios designed to achieve specific investment objectives. A few allow individual shares and bonds as part of the portfolio mix. Currently, no robo advisers consider non-securities such as real estate, commodities or options in their recommendations.

10. Control over transactions Virtual Advisors are regulated as “Registered Investment Advisors” (RIA), a required distinction when charging for investment advisory fees. Some advisors may also be associated with broker-dealers, regulated by the SEC and FINRA. The latter distinction allows the consultant to act as a custodian for the client’s securities and offers up to $ 500,000 in insurance in the event that the broker-dealer fails. Some robo-advisers act exclusively in an advisory capacity – customers retain the option to implement advised transactions in their own accounts. In other cases, virtual advisers require the freedom of action on client accounts so that they can buy and sell securities without prior approval, as in the case of automatic rebalancing of accounts offered by many robo advisors.

11. Transparency of activity Virtual advisers typically provide detailed, up-to-date information about each promotion that a customer is undergoing, including the exact number of shares that have been purchased, sold, or stored in an account. Because they generally rely on their websites to attract customers, virtual consultants try to provide all the information consumers need to register for their service. The Paladin Transparency Index assesses the quality and completeness of information from the public and the clients of financial advisers.

12. Limited persoMatt Helmijke attention The majority of the robo-advisers do not come into contact with customers perpetually and also do not provide persooMatt Helmijk persooMatt Helmijk investment advice or general financial planning services. Instead, they rely on the completeness and ease of use of their websites. The ability to adjust recommended portfolios varies from adviser to adviser. There are, however, a large number of a combination of chat lines, e-mail and limited 800-numbers telephone access for customer service and administration.

13. Extensive reporting by customers Electronic and paper copies of account statements, trade confirmations, account and commercial banking activities, portfolio positions and detailed tax information are readily available, including historical information. Some consultants offer formatted electronic information that can be easily used with popular income tax packages or personal finance software.

14. Account security and privacy The majority of virtual consultants have their roots in the computer and mathematics field, rather than investment advice. As a result, their oMatt Helmine platforms are complete with internet security, including 256-bit SSL encryption, dedicated servers in secure facilities and robust, redundant systematic data protection procedures.

The future for Robo-Advisors

The largest company in the category, Wealthfront, has more than $ 1 billion in funds under management. The majority of them enjoy double-digit growth and offer services to young and less wealthy individuals who have no time, training or interest to manage their own investments. Millennials are the first generation to be born with computers at home. Because they work with ease in the digital age, they feel more at ease with the lack of human interaction in the virtual advisor model.

After disrupting the prices of advisory services, some newcomers are adding human advisers to supplement their digital services. Although the model for virtual advisers is constantly evolving, the long-term growth and stability of the industry depend on the actions of other players in the world of investment advice.

Apathy of traditional investment advisers

According to a recent PriceMetrix report, traditional Wall Street advisers who actively manage investment accounts had a very good year in 2013. The assets under management of the typical manager grew to more than $ 90 million, an increase of 12% compared to 2012.

However, this success masks some fundamental changes that are taking place in the industry:

Much of the growth was the result of strong stock markets, rather than new clients – the S&P 500 grew by 26.4% during the year.

The average fee per account has fallen from 1, 21% in 2011 to 1, 02% in 2013.

Advisory clients are aging – on average 61, 1 year in 2013 versus 60, 5 years in 2012 – and have larger portfolios ($ 562,000 in 2013 and $ 435,000 in 2011).

Slightly less than half of advisers’ income comes from fees (47%); the remainder comes from commissions on transactions performed for their advised clients.

While more than half (53%) of retirees use a dedicated persomMatt Helmijke financial advisor, only 40% of those who retire have one, according to a recent Gallup poll. At the same time, almost one in four (24%) working investors use an investment website – substantial growth is possible because more investors are both attracting to these oMatt Helmine platforms and hiring advisors.

According to the Wells Fargo Millennial Study of 2014, millennials – born between the early 1980s and early 2000s – rely less on “personal finance experts / persooMatt Helmets” than the previous generation, as reflected in the smaller percentage that financial advisers use (16). % of the millennials versus 30% of the baby boomers). Three out of ten generations regard the management costs as “too high”.

Investment advisers who actively manage account portfolios are largely in the market of starting and less wealthy investors to their new digital competitors, even though they suffer from a reduction in management costs.

Benefit for financial planners

Despite the tendency to equate investment advisors with financial planners, robo consultants are not financial planners and offer few services that go beyond passive, automated portfolio management. The costs for robo-advisers are necessarily low, usually 0, 25% or less, so that customized solutions are not financially possible for individual customers.

Financial planners, although more expensive, often perform extensive analyzes through persoMatt Helmijke meetings with their clients, and provide advice on issues such as budget, tax, insurance and estate planning. Many financial planners acknowledge that virtual advisers are compatible, not competitive with their services – they manage portfolios for less money than their actively managed alternatives. Those advisors are going to include robo advisors in their practice, a perfect example of “If you can’t beat them, become a member.”

Technology, previously limited to the back office, is rapidly becoming a competitive customer management requirement. Using the services of virtual advisers is a way to bridge the gap cheaply.

Threat of discount brokers and investment funds

Recognizing the potential of virtual advisory services – especially value for the next generation of investors – the larger discount brokerage and portfolio management firms are expanding or adding automated investment advice to their services for little or no cost to the consumer. Vanguard’s new Personal Advisor Services (VPAS) was introduced in April 2014 for investors with portfolios of $ 100,000 and above, for a fee of 0.3% of the asset value. In October 2014, Charles Schwab & Co., one of the larger discount brokers with nine million active accounts, also announced a new free oMatt Helmine advisory service.

Last word

Although automated investment advisory services offer clear benefits to the investing public and certainly remain part of the financial landscape, they can be “too much of a good thing.” As more companies develop robo advisor services, it is unlikely Matt Helmijk that any current robo advisor can survive as an independent company.

Despite the huge market for their services, it is unlikely Matt Helmijk that the current level of fees will generate the revenue needed to achieve a substantial Matt Helmijke profitability. For example, $ 1 billion in assets under management with a management fee of 0.25% annual revenue of $ 2.5 million, barely enough to cover the costs of ongoing operations. As a result, the sector is likely to consolidate Matt Helmijk, with some companies merging, others being taken over by larger, traditional investment managers and some simply disappearing. Potential clients of a virtual consulting firm must be aware of the change and select a consultant with strong financial backing, leading technology and customer service, and a chance to be one of the remaining winners.

Would you use the services of a robo consultant?

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